Ally Bank to change easy early withdrawal penalty

(MoneyWatch) On Oct. 26, Ally Bank's web page suddenly showed a new schedule for early withdrawal fees. Ally Bank spokesperson Andrea Puchalsky told me the changes would go into effect beginning Dec. 7, 2013, and that these changes would not affect existing CDs or those opened on or before Dec. 6.

The Ally 5-year CD is something I've been recommending for years. The current 60-day early withdrawal penalty gives depositors the right to get their money back with an ultra-low cost, whether they needed the funds or wanted to reinvest in a new CD or bond fund at higher rates. This provides protection from rising rates.

The 60-day early withdrawal penalty remains for CDs of two years or less. Longer-term CDs will have the following penalties:

3-Year High Yield CD - 90 days' loss of interest

4-Year Raise Your Rate CD - 120 days' loss of interest

5-Year High Yield CD - 150 days' loss of interest

Analysis

CBS News calculations

I calculated the impact of the change on its 5-year CD. Based on the current APY of 1.60 percent, the change increases the penalty from 0.26 percent of the CD amount to 0.65 percent. Breaking the CD after one year would give a net yield of 1.34 percent currently, but will decline to 0.95 percent for CDs opened on or after Dec. 7. I calculated other net yields based on when the CD is broken.

I agree with the analysis of DepositAccounts.com founder Ken Tumin, who alerted me to this change and broke the news even before Ally changed its website. Though this isn't great news for consumers, Ally Bank honored its promise to MoneyWatch that a previous change in its deposit agreement did not give it the right to retroactively change early withdrawal penalties, as some credit unions have done.

Still, this CD can be an effective tool for those not wanting to take much risk should interest rates rise further. By comparison, the Vanguard Short-Term Bond EFT (BSV) yields 0.76 percent and would decline by an estimated 2.7 percent if rates rose by one percentage point. The Ally CD thus yields twice the rate and one could get out with a 0.65 penalty, far less than the 2.7 percent decline in the bond fund.

For those who are thinking of opening an Ally CD, do it before Pearl Harbor Day. After Dec. 6, however, the Ally Bank 5-Year CD can still make sense versus short-term bonds.

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.